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Are the GOP Tax Cuts Spooking the Stock Market?

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After a prolonged and unprecedented period of stock market calm, investors are looking for someone or something to blame for the recent sharp drop in equities and Tuesday’s volatile swings.

The immediate cause of the stock market plunge was a jobs report on Friday that showed stronger wage growth in January, suggesting that a long period of wage stagnation may finally be coming to an end. This could be a sign of increasing inflation, which would result in higher interest rates as investors demand higher returns on bonds.

Andrew Ross Sorkin of The New York Times says that investors are worried that the tax cuts, along with other stimulative factors, will work too well: “The reason for the market’s downward turn isn’t that investors believe his stimulus measures, like tax cuts and deregulation, are failing, or might fail. It is quite the opposite: Investors believe his policies to stoke growth are going to work so well that they will overheat the economy, and force the Federal Reserve to try to slow things down by raising interest rates faster than expected.”

Joseph Carson, the former director of economic research at AllianceBernstein, wrote at Bloomberg Tuesday that two policy experiments are at risk of colliding right now: Accommodative monetary policy in the form of very low interest rates is coming to an end just as significant fiscal stimulus from the tax cuts begins. The likely result, Carson writes, is “higher official and market interest rates, increased volatility in the financial markets, and downward pressure on financial asset prices.”

House Ways and Means Committee Chair Kevin Brady (R-TX)told reporters Monday that the sell-off in stocks was actually the sign of a healthier economy, due in part to the tax cuts. “It reinforces that tax reform is growing this economy. So, wages are increasing, which they haven’t for more than a decade — that’s a good thing. And so that is a part of the inflation, and then the second concern from Wall Street appears to be the Fed normalizing its interest rate — something that everyone has said is long overdue and a signal of a stronger economy, one that one can assimilate those interest rate increases.”